Cash Earnings? We Don’t Need No Stinkin’ Cash Earnings

By Fleming Meeks

SINCE ITS INITIAL PUBLIC offering in 2001, soybean processor (ticker: BG) has reported a total of $4.3 billion in net earnings. Over the same period the firm, which is also the largest fertilizer producer in Brazil, has had negative free cash flow of more than $700 million, including $186 million of negative free cash in the first three quarters of 2009. For the full year free cash flow is expected to drop to minus $1.2 billion.

Bunge is a huge business with very narrow profit margins. In the first three quarters of 2009, the company had revenue of $31.5 billion and operating profits of just $280 million. Now get this: Over that same period the company reported $470 million in currency gains. Without those gains Bunge would have had operating losses of $190 million, which helps explain how the company reaped $52 million in tax benefits in the quarter. All in all, Bunge reported net income of $343 million for the period.

For the full year, analysts expect the company to report earnings of $438 million, or $3.24 a share, on revenue of $4.25 billion. But how much the company will actually earn is anybody’s guess.

Bunge is a play on one of the biggest global megatrends there is: food. Rising affluence in emerging markets will increase demand for more and better food in years to come. And lately food stocks have been sizzling. Over the past six months, the DAXglobal Agribusiness index is up 44%.

Bunge’s shares haven’t kept up, but over the last couple of weeks they’ve been making up for lost time. The stock got hit in October after management lowered its ’09 earnings guidance to $3.10 to $3.50 a share and declined offer guidance for 2010. Only a few months earlier, shortly before the company’s $786 million secondary offering in August, management reaffirmed its ’09 guidance for $4.90 to $5.40 a share.

Investors seem willing to forgive and forget. Since Christmas Eve, when the company announced that it would pay $900 million for a company with stakes in six Brazilian sugar crushing facilities, Bunge’s shares have jumped 14%, to $70.93.

The deal expands Bunge’s exposure to the biofuel business, and the cynic in us thinks it will even further cloud the company’s accounting.

There are other concerns, but the fact that Bunge has produced no cash earnings in its eight years as a public company is reason enough to stay away. Shorting the stock requires guts but will likely pay off down the road. The share price could ultimately fall by a third or more. “At some point Bunge is going to blow up,” says a money manager who’s short the stock. But in the short term the shares could be swept higher as momentum players pile into the whole group.

Fleming Meeks is executive editor of Barron’s and the founding editor of Barron’s Daily Stock Alert. He previously served as editor of SmartMoney, The Wall Street Journal Magazine, and assistant managing editor of Barron’s. Meeks began his career in journalism 25 years ago as a staff writer for Forbes. He holds a B.A. degree from Windham College.If you have comments or questions, please contact him at fleming.meeks@barrons.com

David Englander is a staff writer for the Barron’s Daily Stock Alert. He joined in 2008 as a reporter. Prior to Barron’s, he worked as a consultant, advising Fortune 500 companies on growth strategies and mergers and acquisitions. He has also worked as an independent equity analyst. Englander holds a B.A. from Amherst College, an M.B.A. from the University of Rochester and an M.F.A. from Columbia University.If you have comments or questions, please contact him at david.englander@barrons.com

Alexander Eule has been a staff writer for Barron’s Daily Stock Alert since 2010 and a reporter for Barrons.com since 2006. Prior to the Stock Alert, Eule wrote the site’s Barron’s Take and Weekday Trader features, offering frequent insights into individual stocks and the broad market. He holds a B.A. from Columbia College and an M.S. in Journalism from Columbia University.If you have comments or questions, please contact him at alexander.eule@barrons.com